Gerber Life Insurance: Is it Worth the Money? (2012 Edition)

One of the most popular posts here at CFO is my analysis of Gerber Life Insurance. Since it’s over four years old, I thought it was time to revisit the issue and ask again: Is Gerber Life Insurance worth the cost?

A few months ago, I discussed when you need (and don’t need) life insurance. The simple answer was that you should buy life insurance if the death of the insured would cause a financial hardship. Usually, that means a breadwinner or caregiver – for example, if Dad is the main source of income and his death would leave the family without enough money to get by, then a life insurance policy for Dad would be a great idea.

But the death of a child, as tragic an event as it is, doesn’t normally present this type of financial hardship. That’s why I scoffed at Gerber Life Insurance before my children were born – it seemed designed for suckers.

However, Gerber’s Grow-Up Plan is a whole life policy. Whole life insurance is a little more complicated than term insurance, which only pays out if you die within a specified period of time. With whole life insurance, the policy isn’t for a set period but rather for the rest of your life. Partly because of that, the premium is considerably higher than the premium for a term policy. And, unlike with term insurance, part of the premium of a whole life insurance policy goes toward an investment component. Generally, the return on the investment portion of a whole life policy is such that it’s not considered a good investment, i.e., you could get a better return on your money elsewhere.

So I look at the Grow-Up Plan not so much for the life insurance component, but as an investment option. Premiums are determined by your child’s age, gender, and state of residence, and are guaranteed to remain the same. Coverage is automatically doubled when the child turns 18. The policy’s cash value will be at least equal to or greater than 100% of the premiums paid after 25 years. As an adult, the originally-insured child is guaranteed the right to purchase up to 10 times the original coverage amount, regardless of health, occupation, and other factors that may render him or her ineligible with other companies.

For my 7-year-old, a $50,000 policy would cost $37.40 per month, or $448.80 annually. Paying $448.80 each year for the next 25 years is a total expense of $11,220. If I took at that $37.40 per month and invested it in a mutual fund that earned a conservative 3% for 25 years, I would have $16,857.90 – that’s an increase of $5,637.90. If the mutual fund grew at 5%, my total would be $22,796.52. So if I put the money toward the Grow-Up Plan, in 25 years, I’d have cash value of $11,220 (and possibly more), but if I invested the money in a mutual fund, I’d probably have quite a bit more. The tradeoff is that I wouldn’t have the insurance payout.

Since the coverage doubles but the premium remains the same at age 18, I wondered what would happen if you bought the policy at age 14 (the last year a child is eligible for the Grow-Up plan). The premium on a $50,000 policy for a 14-year-old boy in California would be $47.48 per month, or $573.36 per year. Right now, I’m seeing annual premium quotes for $100,000 whole life polices for 18-year-old males in California for as low as $342. So the $100,000 whole life policy itself doesn’t seem like a good deal.

My non-expert conclusion is that if you think your child is unlikely to be eligible for life insurance when he or she is older, the Grow-Up Plan is an option you may want to consider now. But it seems like everyone else would be better off investing the money elsewhere – say, tax-advantaged vehicles like 529 plans, Coverdell Educational Savings Accounts, or even your Roth IRA.

Disclosure: This post has no association with Gerber, although the link to the Gerber Grow-Up Plan is monetized via Viglink. I am not an expert on insurance; consider this post food for thought and consult a real expert for in-depth questions. Read the full CFO disclaimer and disclosure policy here.